1. In this reference, under section 66(1) of the Indian Income-tax Act, 1922, the Income-tax Appellate Tribunal (Bombay Bench 'B') has referred two questions of law our opinion. They are :
'(1) Whether initiation of action under section 34(1) for the purposes of making reassessment for the assessment year 1954-55 has been validly made
(2) Whether interest on Mysore Durbar Securities has been rightly held to be chargeable to super-tax under the Indian Income-tax Act for the assessment years 1954-55 and 1956-57 ?'
2. The facts of the case as disclosed by the statement of the case submitted by the Tribunal to the extent relevant for our present purpose reads as follows :
3. These two reference applications arise out of the reassessments made upon the assessee, a public company, for the assessment year 1954-55 by taking recourse to the provisions of section 34 and the original assessment made upon it for the assessment year 1956-57. The corresponding previous years are the calendar years 1953 and 1955. The dispute between the assessee company and the department is in regard to the levy of corporation tax, more popularly known as super-tax, on income derived by the assessee company from Mysore Durbar Securities. The relevant facts relating to the said issue are these.
4. The Government of the erstwhile India State of Mysore issued certain Durbar Securities between 1930 and 1946. There was in force the State income-tax law. The said Government issued notifications directing that the interest income derived from these securities was to be included in the computation of total income of an assessee for the purpose of determining the rate applicable to the taxable income. In other words, such interest income was partially exempt.
5. Section 60(1) of the Indian Income-tax Act empowered the Governor-General in Council (subsequently changed to the Central Government) to make exemptions, etc., and the material portion of it (with verbal changes made subsequently) stands as follows :
'60. (1) The Central Government may, by notification in the Official Gazette, make an exemption, reduction in rate or other modification, in respect of income-tax in favour of any class of income, or in regard to the whole or any part of the income of any class of persons.'
6. Sub-section (3) of section 60 was added by the Indian Income-tax (Amendment) Act, 1939, and it stands as follows :
'60. (3) After the commencement of the Indian Income-tax (Amendment) Act, 1939, the power conferred by sub-section (1) shall not be exercisable except for the purpose of rescinding an exemption, reduction or modification already made.'
7. The said Amendment Act came into force with effect from April 1, 1939.
8. In exercise of the powers conferred by section 60 (1), Notification No. 878-F (Income-tax) dated 21st March, 1922, was made. It provided as follows :
'The following classes of income shall be exempt from the tax payable under the said Act and they shall not be taken into account in determining the total income or salary of an assessee for the purpose of the said Act...
(27) The interest on Mysore Durbar Securities.'
9. The effect of this notification was that the interest on Mysore Durbar Securities was totally exempt under the Indian Income-tax Act in the hands of the holder of Mysore Durbar Securities, i.e., interest was neither included in the total income for the purposes of the rate applicable to the taxable income nor was it taxed either to income-tax or to super-tax. It will be further observed that this exemption went much further than a partial exemption granted by the Mysore Durbar itself.
10. In exercise of the powers conferred upon it by section 60(3), the Central Government by its Notification No. 39 (I. T.) dated 5th July, 1954, modified the said exemption and provided that interest on Mysore Durbar Securities shall be included in the total income and shall be exempt from income-tax but not from super-tax. The said notification also provided that it will have effect 'for the purpose of making any assessment subsequent to the year ending on the 31st day of March, 1954', i.e., for the assessment year 1954-55 and subsequent thereto.
11. The original assessment for the assessment year 1954-55 was completed by the Income-tax Officer on 31st July, 1954. In computing the said assessment, the Income-tax Officer did not take into consideration the interest received by the assessee on Mysore Durbar Securities. In other words, he without book acted upon the Notification No. 878-F (Income-tax) of 21st March, 1922. Obviously, he acted in completing this assessment as he did in ignorance of the latter Notification No. 39 (I. T.) dated 5th July, 1954. In all probability, he was quite unaware of the said notification. It is, however, alleged by the assessee that the said notification was before the Income-tax Officer when he made the assessment on 31st July, 1954, and that he did not choose to act upon it. Unfortunately, no finding on this disputed fact has been given either by the Appellate Assistant Commissioner or the Tribunal. Hence, we would reproduce the reason recorded by the Income-tax Officer in making his proposal to the Commissioner for initiating action under section 34. It is as follows :
'(Note : We wanted to reproduce the reasons recorded by the Income-tax Officer; but the Income-tax Officer's file was 'lost' during transit from Udipi to Bombay in connection with this reference application. Proposal on the record of the Commissioner's file could not also be secured since the relevant file was misplaced in his office and was being traced. The department will produce a copy of the said proposal if the relevant papers are traced by the time the matter came up for hearing before the High Court.)'
12. After securing the Commissioner's notification, a notice under section 34(1) was served on the assessee on December 7, 1956. In response thereto, a return was made on January 9, 1957, and the Income-tax Officer completed the assessment on January 26, 1957. In completing the reassessment, the Income-tax Officer included certain sum in the total income and exempted it only from income-tax but not from super-tax in view of the Notification No. 39 (I. T.) dated 5th July, 1954.
13. In the course of the original assessment for 1956-67, the Income-tax Officer treated the said income, viz., interest from certain Mysore Durbar Securities, in the same manner as he did in the reassessment proceedings for the assessment year 1954-55.
14. Being aggrieved, the matter was taken in appeal to the Appellate Assistant Commissioner for the years 1954-55 and 1956-67. For the assessment year 1954-55, the assessee challenged the initiation of action under section 34 on the ground that when the Income-tax Officer made the original assessment on July 31, 1954, he had before him the Notification No. 39 (I. T.) and hence action under section 34 was not justifiable. Another contention taken before the Appellate Assistant Commissioner was that the said Notification No. 39 (I. T.) could not deprive the assessee of his right to exemption since it could come into effect only from its date of publication, i.e., 5th July, 1954. The third contention raised before him was that, having regard to the second proviso to section 8 of the Income-tax Act, the Central Government should have asked the concerned State Government, i.e., the Mysore State, to pay tax on the said interest income instead of withdrawing the exemption in the manner it did. The Appellate Assistant Commissioner rejected all the three contentions by his order dated June 23, 1957. Copy of the said order for the assessment year 1954-55 is marked annexure 'A' and forms part of the case.
15. Coming to the appeal for the assessment year 1956-67, the Appellate Assistant Commissioner, by his order of July 25, 1957 (incidentally the same Appellate Assistant Commissioner passed this order who disposed of the assessee's appeal for the assessment year 1954-55), disposed of the assessee's contention by observing as follows :
'Levy of super-tax on interest receivable on securities issued by the Mysore and Hyderabad Governments :
For the reasons stated by me in my order in I. T. A. No. 890/56-57 dated June 23, 1957, the contention of the appellant cannot be sustained.'
16. Being aggrieved by the decisions given by the Appellant Assistant Commissioner, the assessee brought the matters in appeal to the Tribunal. Having regard to certain allegations made in the statement of facts, enclosed with the applications made under section 66(1), we find it desirable to reproduce the actual and relevant written grounds of appeal :
(1) The Appellate Assistant Commissioner in construing that the notification dated 5th July, 1954, could have retrospective effect on the assessment of 1954-55 and holding that the rights of holders of Mysore Durbar Securities, could, by notification, be denied.
(2) In view of the clear inducement offered at the time of the issue of these securities, the appellant contends that such rights cannot, on principles of equity and justice, be denied till the maturity of these securities :
(3) Without prejudice to the above contention, the appellant submits that the Income-tax Officer was in possession of the notification at the time of the assessment and could have then applied his mind to this. The Income-tax Officer was not right in reopening the assessment relying on section 34(1)(b).'
(3) Interest on State Government Securities - Rs. 79,182 :
The learned Income-tax Officer has relied on the statement in Appeal No. 890/56-57 (1954-55). This is not right, as the facts and principles are not the same in each of these cases. The appellant submits that in view of the clear inducements offered to the subscribers of these securities at the time of issue, the interest can be added to the income only for purposes of arriving at the total world income and not for taxation either for income-tax or super-tax (corporation tax). The appellant has to state that the provisions of the Explanation to section 9 of the Indian Income-tax Act should not have been applied to this interest and that the tax on this interest is chargeable at the hands of the State Government under proviso 3 of section 8 of the same Act. The appellant contends that such rights as are forming the terms of the notification of issue of securities and were conferred by the notification in force at the time of issue cannot on the principle of equity and justice be denied to the holders of such securities till their maturity, and hence the appellant seeks full relief in respect of the above sum of Rs. 79,182.'
17. These two appeals were disposed of by the Tribunal by its consolidated order made on 23rd April, 1960. A copy of the said order is marked annexure 'B' and forms part of the case. For the reasons given by it in paragraph 9 of the said order, it rejected the assessee's contention in regard to the invalidity of initiation of action under section 34(1). In doing this, it relied upon the Supreme Court decision in the case of Maharaj Kumar Kamal Singh.
18. Going into the merits of the contention raised for the two years, the Tribunal mentioned the contentions in the following words :
'(1) Firstly, it is argued that the notification can deprive the appellant's right to the exemption if at all only from 5th July, 1954, and not from a prior date (vide paragraph 11 of annexure 'B').
(2) The validity of the notification is also attacked on another ground, viz., that instead of rescinding the exemption by means of the aforesaid notification (i.e., Notification No. 39 (I. T.) of 5th July, 1954-CLP), the Central Government should have asked the concerned State Government to pay the taxes pursuant to the third (sic) proviso to section 8'. (The reference is presumably to the second proviso).
19. It rejected both these contentions for the reasons given by it in its order (annexure 'B'). But now the assessee requires the Tribunal to refer to the High Court the following questions :
Assessment year 1954-55
'(a) Whether the notice under section 34(1)(b) and the proceedings thereunder are vali
(b) If the answer to the first question is in the affirmative, whether the interest on Mysore Durbar Securities held by the assessee or any of them was chargeable to super-tax under the Indian Income-tax Act ?'
Assessment year 1956-57
'(a) Whether the exemption in respect of the income Mysore Durbar Securities can be modified or deleted so as to prejudicially affect the rights of the assessee.
(b) Whether the treatment of the income from Mysore Durbar Securities in the hands of the assessee by the income-tax authorities is correct ?'
20. In our opinion, on the facts of the case, the following questions of law arise :
'(i) Whether initiation of action under section 34(1) for the purposes of making reassessment for the assessment year 1954-55 has been validly made
(ii) Whether interest on Mysore Durbar Securities has been rightly held to be chargeable to super-tax the Indian Income-tax Act, 1922, for assessment years 1954-55 and 1956-57 ?'
21. Sri T. Krishna Rao, the learned counsel for the assessee, did not press the second question formulated above. The relevant notification clearly shows that exemption given is only in respect of income-tax and not super-tax. In fact that notification directs that the interest income derived from the Durbar Securities must be included in the computation of the total income of the assess. An observed by the Madras High Court in Nachiappa Chettiar v. Commissioner of Income-tax, in the matter of any exemption under section 60 of the Income-tax Act, the Government of India can by notification deal with income-tax or super-tax or with both.
22. But the more important question is whether the Income-tax Officer had competence to initiate proceedings under section 34(1). It is urged on behalf of the assessee that the Income-tax Officer did not act in consequence of any information. According to the assessee, even at the time of the assessment, the Income-tax Officer had before him the Notification No. 39 (I. T.) dated July 5, 1954; but he thought that on a true interpretation of that notification, the disputed income is exempt from tax. Hence, it was not open to his successor to take action under section 34(1)(b). There is no material on record to show whether the Income-tax Officer had knowledge of the aforesaid notification at the time of the assessment or not. The Tribunal has opined that, in all probability, he was quite unaware of that notification. Though it is for the revenue to establish that the conditions laid down in section 34(1)(b) are satisfied before taking action under that provision, on the material before us, we are unable to hold that the conclusion drawn by the Tribunal is an unwarranted one. If the Income-tax Officer was unaware of the notification in question, his subsequent information about that notification is certainly an 'information', within the meaning of the expression found in section 34(1)(b).
23. Assuming that the Income-tax Officer had the relevant notification before him but he either did not read it or was unable to understand its implications and later either by himself or with the assistance of others, he became aware of its true meaning, can that be said to be an 'information' empowering him to take action under section 34(1)(b). The words 'information' and 'escaped' have been widely interpreted in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax. Therein their Lordships held that if the word 'information' in its plain grammatical meaning includes information as to facts as well as information as to the state of the law, it would be unreasonable to limit it to information as to the facts on the extraneous consideration that some cases of assessment which need to be revised or rectified on the ground of mistake of law may conceivably by covered by section 33B and 35; the word 'information' in section 34(1)(b) includes information as to the true and correct view of the law. Their Lordships further observed, judging by the dictionary meaning alone, it would be difficult to confine the meaning of the word 'escape' in section 34(1)(b) only to cases where no return has been submitted by the assessee; even if the assessee has submitted a return of his income, cases may well occur where the whole of the income has not been assessed and such part of the income as has not been assessed can well be regarded as having escaped assessment; there is no justification for holding that cases of income escaping assessment must always be cases where income has not been assessed owing to inadvertence or oversight or owing to the fact that no return has been submitted; even in a case where a return has been submitted, if the Income-tax Officer erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment.
24. We have no doubt that the present case falls within the sweep of this decision. But, our attention was invited to certain observations found in paragraph 18 of the judgment of the Supreme Court. The relevant passage reads thus :
'It appears that, in construing the scope and effect of the provisions of section 34, the High Courts have had occasion to decide whether it would be open to the Income-tax officer to take action under section 34 on the ground that he thinks that his original decision in making the order of assessment was wrong without any fresh information from an external source or whether the successor of the Income-tax Officer can act under section 34 on the ground that the order of assessment passed by his predecessor was erroneous, and divergent views have been expressed on this point. Mr. Rajagopala Sastri, for the respondent, suggested that under the provisions of section 34 as amended in 1948, it would be open to the Income-tax Officer to act under the said section even if he merely changed his mind without any information from an external source and came to the conclusion that, in a particular case, he had erroneously allowed an assessee's income to escape assessment. We do not propose to express any opinion on this point in the present appeal.'
25. We are told that the present case comes within the controversy which was left undecided by the Supreme Court. We are not clear that it is so. In our opinion, a failure to understand the true implication of any particular notification at one stage and a correct understanding of the same at a later stage, does constitute an 'information' falling within the ratio of the decision above referred to.
26. Lastly, it was urged by Sri T. Krishna Rao that the notification dated July 5, 1954, being not retrospective in effect could not have been applied for the assessment year 1954-55; at any rate it was ineffective in respect of the income earned between April 1, 1954, and July 4, 1954. This is not a point referred for our opinion and hence there is no need to deal with the same. But we may incidentally mention that this point is covered by a decision of a Bench of this court in Appanna v. State of Coorg and that decision is against the contention urged by Sri T. Krishna Rao.
27. In the result, we answer both the question referred for our opinion against the assessee and in favour of the department. On point No. 1 our answer is that the initiation of action under section 34(1) for the purposes of making reassessment for the assessment year 1954-55 had been validly made, and on point No. 2, the interest on Mysore Durbar Securities had been rightly held to be chargeable to super-tax under the Indian Income-tax Act for the assessment years 1954-44 and 1956-57. Advocate's fees Rs. 250.